After years of playing second fiddle to cash equities, equity derivatives are finally moving into the spotlight.

Although most banks have yet to report their full 2012 figures, analysts predict strong relative performance from the products last year.

According to research by capital markets consultancy Coalition, equity derivatives, including convertibles, leap-frogged cash equities to become the biggest source of equities revenues for the first time in the first nine months of last year (see chart). They accounted for 31%, or $8.06bn, of total equities revenues across the 10 largest banks. This compared with 28% in the same period the previous year. Cash equities accounted for 30%, or $7.8bn, during the same period, down from 36% the previous year.

In such a poor year for cash volumes – the value of European equities trading fell by more than a fifth in 2012, according to data from Thomson Reuters – a collapse in revenues from these products is not surprising. But coupled with this has been a resilient performance from derivatives as hedging appetite has remained strong against an uncertain economic backdrop.

Rui Fernandes, head of equity derivatives structuring for Europe, the Middle East and Africa at JP Morgan, said: “The story of equity derivatives over the past 12 months has been one of consistency and stability of revenues.

“The broader range of products within the franchise, and their wider use across investment strategies, hedging and corporate activity, has meant that they have been able to weather the storm created by falling volumes.”

Fernandes highlighted the performance of products that allowed investors to trade on volatility, and hedge against tail-risk events. The Vix index, which measures expected volatility on S&P 500 stocks, spiked to more than 45 basis points in the second half of 2011, compared with an average of 20. Last year it spiked to 22 and is currently hovering just above 13bps.

Calmer markets helped to boost equity options trading, which becomes more expensive as implied volatility increases, but have also prompted investors to protect themselves against a market crash. Maintaining a long position on volatility through the use of derivatives on the Vix has traditionally been expensive, but more efficient solutions have been forthcoming, according to Fernandes.

Fernandes said: “By far the biggest growth area last year was in products that allow trading around volatility, and Vix in particular. We have been trying to create more efficient ways of trading around Vix to reduce the cost of carry, and volumes have really materialised from that. Clients value these products as key tail-risk hedging strategies, particularly in light of issues around the eurozone crisis, the fiscal cliff and Middle Eastern instability.”

Equity derivatives have also benefited from cash equities’ expertise in technology, as these divisions have become less prominent. Darko Kapor, a managing director at capital markets consultancy Tricumen, said: “Equity derivatives have benefited from reduced costs; parts of the flow business became more integrated with cash equities, and the use of electronic solutions to deliver retail structured products have gained popularity.”

There are already signs that equity derivatives could become more important this year, as investors rediscover an appetite for equities.

David Escoffier, global head of equities flow at Societe Generale, said: “There is a sense of a need to reallocate towards equities. On the back of that, we have seen some very large trades on European and Asian indices recently, in volatility as well as programme trades and exchange-traded funds. I foresee those sorts of trades continuing as volumes gradually ramp up, particularly from US-based institutions into Europe and by retail investors into global equities.”